Proper diversification remains the key responsibility of the individual investor when it comes to preparing an income portfolio. For investors looking to replace their income, selecting companies from distinct sectors helps to protect against industry-specific risks. Being able to spread about such risk is a requisite in order to maintain a consistent flow of income in light of changing economic conditions that inevitably will occur. A well-rounded dividend portfolio should be able to return a steady flow of income that will allow some companies to flourish even when others fail to do so.
However, seemingly all too often investors will find themselves replicating their exposure into like-minded equities in a pursuit for high-yield returns. This is particularly the case for those utilizing a stock screener in order to filter out stocks with an above average dividend yield. As it stands, the majority of high-yielding investments tend to fall into a few select categories. Many of these companies come in the form as master limited partnerships or real estate investment trusts. Therefore the risk here is that an investor who has Enbridge Energy (EEP) in their portfolio, for example, might also find themselves tempted to add Kinder Morgan Energy Partners (KMP). While they each yield 7.8% and 6.3% respectively, they are both confined to the oil & gas transportation and storage industry and each of these are structured as master limited partnerships with complicated tax implications. In this particular instance, such an investor may be opening up an unnecessary risk should oil demand find a reason to wildly fluctuate.
Taking this into consideration, it is important to add supplementary income sources that could help shelter the investor regardless of the economic picture at hand. The following is a short list of some high-yielding companies operating in distinct markets. Each of these investments were chosen on the basis of their historical consistency to pay an above-average dividend yield. They all have market capitalizations of more than $1 billion and they each operate within a unique industry sector that can often be overlooked. Taken individually, many of these companies may help to round out a high-yielding portfolio by adding distinct market exposure. All values were taken from Yahoo! Finance as of December 21, 2012.
|Company Name||Market Cap.||Fwd. Div. Yield||Payout Ratio||Industry|
|Delhaize Group (DEG)||$4.0 Billion||4.0%||36%||Grocery Stores|
|Vector Group Ltd. (VGR)||$1.3 Billion||10.6%||571%||Cigarettes|
|New York Community Bancorp (NYCB)||$5.8 Billion||7.6%||88%||Savings & Loans|
|Bristol-Myers Squibb Company (BMY)||$53.8 Billion||4.3%||124%||Drug Manufacturer|
|Regal Entertainment Group (RGC)||$2.1 Billion||6.1%||117%||Movie Theatres|
|Six Flags Entertainment Corporation (SIX)||$3.3 Billion||6.0%||103%||Amusement Parks|
|Veolia Environnement (VE)||$6.1 Billion||6.3%||N/a||Waste Management|
|Pitney Bowes (PBI)||$2.2 Billion||13.7%||51%||Business Equipment|
|Ship Finance International Ltd. (SFL)||$1.3 Billion||9.7%||75%||Shipping|
|Cliffs Natural Resources (CLF)||$5.0 Billion||7.0%||15%||Iron & Coal Mining|
When considering just what a typical dividend yield is, it's often ideal to contrast this characteristic against a commonly accepted metric. In our case, we'll use the yield of the S&P 500 as the benchmark for an average dividend. As a stock index that follows the common stock prices of 500 publicly traded American companies, the S&P 500 is often referred to as a measure of the market itself. As seen as the graphic below, the current yield of the S&P 500 has been declining over the years. It now rests at a mere 2.07% as of December 21, 2012.
Of the above listed companies, there are a few in particular that might be more susceptible to risk. Cliff Resources, Pitney Bowes, and Veolia Environnement S.A. have all fallen from much greater highs over the past few years. Arguably, Delhaize could also be placed in this category. Yet in each of these names, I personally believe they have found greater support at their current price levels. In the case of Pitney Bowes, the company has also consecutively been raising its dividend since 1983. Apart from Pitney Bowes, each of these companies have price-to-book ratios lower than 1 which could suggest a market undervaluation of the company itself. As seen below, the last five years have not been kind to the stock prices of these companies in particular. While it does not necessarily represent the price action of the future, it is an important consideration to bear in mind.
Taken together, these companies offer a well-rounded approach towards the construction of a high yield income portfolio. However, individually, several of the aforementioned names may carry distinct risks of their own that are unsuitable for some. As is always the case, investors should conduct their own due diligence to make sure that their investment choices carry the right amount of risk that is fit for the person. Overall, the above list offers some unique opportunities for dividend investors and can serve to broaden their perspective when it comes to diversifying their own portfolio constructions.
Disclosure: I am long DEG, PBI, CLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.